Centuria Office REIT (COF) Earnings Call Transcript & Summary

Good day, everyone. Thank you for standing by, and welcome to Centuria Office REIT Half Year 2022 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Grant Nichols, Fund Manager, COF. Thank you. Please go ahead.

Good morning, and thank you for dialing in to the Centuria Office REIT Half Year '22 Financial Results and Fund Update. I am Grant Nichols, COF's Fund Manager. I would like to commence today's presentation with an acknowledgment of country. I'm joining you from the land of the Gadigal people of the Eora Nation. Centuria manages property throughout Australia and New Zealand, and pay its respects to the traditional owners of the land in each country, to their unique culture and to their elders, past, present and emerging. COF has delivered a strong performance throughout the first half of the '22 financial year, providing an upgraded FY '22 FFO guidance of $0.183 per unit and a reaffirmed FY '22 distribution guidance of $0.166 per unit, reflecting a 7.4% yield based on the current trading price. These pleasing outcomes reflect the culmination of strong operating metrics and continued leasing momentum across the portfolio. COF's geographically diversified portfolio of young, quality assets which offer good workforce commutability and attractive affordable rents are offering the accommodation solutions that tenants are increasingly seeking. As Australia's largest listed pure-play office REIT, COF provides a quality, highly diversified portfolio leased to excellent tenant covenants. When combined with a solid weighted average lease expiry, an average building age of around 16 years and ample undrawn debt and debt covenant headroom, COF is well placed to continue delivering attractive income returns to unitholders. Earlier today, we published various documents on the ASX relating to the half year results, including a results presentation which we will go through this morning. Before I start on the COF results, I will provide a brief overview of the manager and the benefits it provides to COF on Slide 3. COF is an externally managed REIT that forms part of the larger Centuria Capital Group family, a leading Australasian real estate funds manager operating under the ASX ticker code CNI and included in the ASX 200 index. We have more than $20 billion of assets under management. Centuria Capital Group specializes in real estate markets, including decentralized office, urban infill industrial, cost-efficient health care property, daily needs retail, large-format retail and agriculture across Australia and New Zealand. It also provides nonbank financing to the Australian property market through [ Centuria Best Credit ]. Additionally, Centuria provides investment bond options through its LifeGoals product range. COF accounts for around 12% of Centuria's total assets under management and is the platform's largest office real estate fund. There is strong alignment between the broader Centuria business and COF. The advantages of being managed by Centuria group has a long and successful track record in property funds management and a substantial commercial property platform, particularly in relation to office real estate. With in-house property and facilities management, Centuria provides a deep leasing capability and hands-on management of the COF portfolio. Centuria Capital Group remains COF's largest unitholder with nearly 18% of the register and has been a strong supporter in COF's evolution to now be Australia's largest ASX-listed pure-play office REIT that is included in both the ASX 300 and the FTSE EPRA Nareit Index. Moving back and we commence with the vision, strategy and objectives for COF on Slide 4. Our focus for COF has been and will continue to be generate predictable and quality income streams by building Australia's largest leading office REIT. Through active and engaged management, Centuria seeks to further enhance the COF portfolio by taking advantage of the opportunities that come from having a diversified portfolio of quality Australian office assets. Looking at this more practically on Slide 5. We believe tenants are increasingly seeking higher quality accommodation in new-generation buildings that provide COVID-safe work environments, efficient floorplates, improved amenity and competitively priced accommodation. Furthermore, there is increased demand to be located in areas that provide short commutes to improve employee satisfaction and attract the best talent. The COF portfolio has been positioned to first meet these changing tenant demands; and secondly, deliver COF's primary objective of sustainable quality income returns to our investors. For some time, we've said the key contributor to employee satisfaction is the length and quality of their work commute. The impacts of COVID have accelerated this, and there is now a strong employee preference towards working close to home, reducing time lost commuting to the workplace. Consequently, we believe businesses will more actively seek a combination of solutions that provide staff with workplaces close to their home, providing better commutability. This workplace change will directly benefit metropolitan fringe markets that COF is exposed to. Affordability is always a key consideration for office tenants. Again, COF is well placed as the portfolio provides consistently high-quality office accommodation at attractive affordable rents with COF's average portfolio of rent below $500 per meter. This rental base generally produces lower income volatility than high-end rents, whilst still providing great opportunity for future growth. For the tenants seeking new accommodation solutions after extended periods of working from home, we think tenants will have a strong preference for improved standards of accommodation and building amenity. As such, there will be a preference towards newer generation of the stock, which should benefit the COF portfolio as the average age of building is around 16 years. The COF portfolio has been further improved by 2 acquisitions made during the half, as noted on Slide 6. 101 Moray Street and 203 Pacific Highway are both A-grade assets that are well leased to a diverse range of quality corporate tenants. Importantly, the location of these assets should deliver strong ongoing tenant demand, being located in key transport infrastructure and surrounded by substantial retail amenity. These acquisitions reinforce the overall COF portfolio metrics that deliver quality, highly connected and affordable office space, particularly a young portfolio with an average age of 16 years, high-quality assets with 90% meeting A-grade specification, highly efficient buildings with a near 5-star average NABERS energy rating, and buildings that provide large, efficient floorplates that are attractive to government and corporate tenants. Looking specifically at 101 Moray Street. This building has had phenomenal recent leasing success, attracting a diverse range of tenants from all over Melbourne, including the CBD. The building was speculatively built. And despite only opening in October 2020, it is now fully occupied. It has leaped through the impacts of COVID in what were weak leasing conditions for the broader Melbourne office market. This leasing success directly relates to my early comment about tenants seeking higher quality accommodation from new generation stock. What is also interesting about the leasing success at 101 Moray Street is that it occurred in a new city market while the Melbourne CBD struggled to attract tenants and, in this case, retain tenants. Settlement of the remaining 50% of 203 Pacific Highway is still yet to occur as we finalize documentation relating to the ground lease. We do not foresee any significant impediments to settlement and expect that it will occur during February 2022. Returning to HY '22, specifically on Slide 8. COF delivered a strong performance throughout the first half of 2022 financial year, enabling us to provide an upgraded FY '22 FFO guidance of $0.183 per unit and a reaffirmed FY '22 distribution guidance of $0.166 per unit, reflecting a 7.4% yield based on the current trading costs. Looking at the results summary in more detail on Slide 9. The COF portfolio performed well through HY '22 with the upgraded FFO guidance directly related to leasing success that occurred during the period with around 18,600 square meters of leases agreed or over 6% of the portfolio NLA. This has improved occupancy to 94.3%, while retaining a healthy weighted average lease expiry of 4.3 years. COF enhanced its capital position through the period with a $201 million equity raising to facilitate the acquisitions and an additional $100 million was added to the COF debt facilities, improving the weighted debt maturity to 3.9 years or providing $127 million of headroom. The REIT now has no debt tranche expiring before June 2024, maintained a competitive all-in cost of debt of 2.3%. Moving to the HY '22 financial results on Slide 11. COF produced funds from operation of $54.7 million, or $0.098 per unit, and paid distributions of $0.083 per unit in quarterly installments. Similar to FY '21, though not as significant as the Foxtel surrender payment, the first half of HY '22 benefited from a number of surrender payments, most notably at William Square and 825 Ann Street. In most instances, incoming new tenants facilitated the lease surrenders. But in the timing differences in lease commencements or terms of surrender of grants have seen some FY '22 growth property income front loaded into HY '22. COF demonstrated continued resilience to COVID-19's impacts. COF's portfolio of rent recollection averaged around 98% for HY '22. The expected credit loss of $1.3 million comprised provided rental rate waivers, totaling approximately $700,000, and other provisions related to COVID-19, predominantly related to agreed rent deferrals. While we expect the hard lockdowns that impacted HY '22 will not occur for the remainder of the financial year, our FFO guidance makes a similar provision for the second half of FY '22. Turning to capital management on Slide 12. As already noted, COF secured an additional $100 million debt facility, which improved the weighted average debt maturity to 3.9 years, with no debt tranche expiring until June 2024. The additional facility maintained COF's competitive 2.3% all-in cost of debt, while further diversifying the pool of lenders to 6, with 4 domestic banks, 1 European bank and now 1 Japanese bank. Pro forma gearing allowing for the settlement of 203 Pacific Highway was 33.1%, with substantial pro forma facility headroom of $127 million. This provides the REIT with sufficient undrawn debt and substantial debt covenant headroom, providing a robust capital structure. Looking at portfolio metrics on Slide 14. COF has a truly geographically diversified portfolio of 23 assets without any single market concentration and exposure to most of Australia's major office markets. What the metrics on this slide also represent is the quality of assets COF has been able to assemble in Australian metropolitan and new city office markets. Beyond the asset metrics, such as 90% of the portfolio being A-grade with an excellent average NABERS energy rating of 4.9 stars, portfolio is supported by excellent tenant covenants. 80% of the portfolio income is derived from government, listed and multinational tenants with only a small exposure to SMEs. The ability to attract quality tenants is reinforced by 72% of COF tenants by area exceeding 2,000 square meters. This indicates robust large tenant demand for quality metropolitan and new city office assets. Despite its exposure to large tenants, COF maintains excellent tenant diversity as only 1 tenant, the Australian federal government, makes up more than 5% of portfolio income. And this exposure comprises a number of different departments across multiple buildings. Moving on to leasing on Slide 15. After a record leasing year in FY '21, COF continued to complete a significant amount of leasing during HY '22 with 18,670 square meters secured, representing 6.2% of portfolio NLA. This includes 9 lease renewals across 13,816 square meters and 14 new leases across 4,854 square meters, including an agreement for a new circa 600 square meter lease at 818 Bourke Street. As a result of the leasing, occupancy increased to 100% at both 825 Ann Street, Fortitude Valley and 35 Robina Town Centre Drive in Robina in Queensland. This was particularly pleasing at 35 Robina Town Centre Drive where Concentrix has renewed its circa 5,500 square meter tenancy for a further 3 years, which, together with other agreed leases, improved the building's occupancy to 100% and extended the WALE to 2.7 years. As a result of the portfolio leasing, COF has increased occupancy to 94.3% and improved the resilience of the leasing profile with more than 71% of the portfolio now expiring at or beyond FY '25. Maintaining high portfolio occupancy is a key management focus, and we are actively seeking outcomes to address our current vacancy and near-term expiry profile. Looking forward to the FY '23 upcoming expiries, and while COF confronts around 15% of the portfolio expiring between now and June '23, no single expiry represents more than about 1.5% of the portfolio. And we are optimistic to providing an improved near-term expiry profile at the full year results in August. Turning to portfolio valuations on Slide 16. As at 31 December 2021, 11 of the 23 assets were independently revalued, resulting in a like-for-like increase in portfolio value of approximately $28.5 million. As a result, COF's pro forma NTA per unit as at 31 December 2021 increased to $2.49. The increase in value was primarily the result of leasing success achieved across the portfolio. The weighted average capitalization rate as at 31 December was 5.65%. Looking into sustainability on Slide 17. COF benefits from Centuria Capital Group's threefold sustainability approach, defined by conscious of climate change, valued stakeholders and responsible business principles, with each area aligned to either an environment, social or governance theme. In October '21, Centuria published its first sustainability report containing details relating to the group's environment, social and government initiatives, including those undertaken by COF. I encourage all investors and analysts to review the sustainability report if they haven't already done so. Throughout HY '22, Centuria and COF implemented further ESG initiatives, including initial disclosures aligned to the Task Force on Climate-related Financial Disclosures, disclosures aligned to the Global Reporting Initiative sustainability reporting standards and delivery of Centuria's second modern slavery statement. Moving to Slide 18. Specific to the environment. High-level physical climate risk assessments of COF assets are ongoing. Furthermore, COF has disclosed its FY '20 and FY '21 energy and water consumption as well as Scope 1 and 2 greenhouse gas emissions and their respective intensities. Looking ahead on Slide 20. As we entered the 2022 calendar year, Australian office markets are navigating through the lingering impacts of COVID and the prospects of rising inflation. Despite these challenges, we believe there is a positive outlook for Australian office markets. The following key themes are likely to dominate in the year ahead. Firstly, and as already mentioned, we expect tenants will gravitate toward higher-quality buildings for a number of reasons, such as creating a new and enticing working environment after a prolonged period of working from home, seeking a combination in buildings that are for higher levels of environmental and well-being credentials to align with the tenants' changing ESG requirements. As technological and communication improvements necessitate change, tenants will be seeking a combination that meets those changing requirements and generally seeking buildings that provide greater efficiencies, safer working environment and greater amenity. Over the course of the year ahead, we believe we'll see working from home transition to a strong employee preference to working near home. Throughout COVID, there has been much debate about the benefits and limitations of working from home, with the benefits mostly weighed to the efficiency of not commuting. Working near home will provide a heavy medium whereby the employer will get the productivity and culture improvements that come from a centralized workplace, while the employee retain the efficiencies of reduced commute times. One of the least discussed impacts of COVID has been obstruction it has caused to accommodation decision-making. This issue has been particularly acute for larger corporate and government tenants, who have been focused on immediate business continuity issues during periods of recurring lockdowns. We see this issue dissipate through 2022 and an increase in tenant activity as a result as tenants who have either postponed or been unable to make future accommodation decisions return to the market. What will further accelerate tenant activity is the robust Australian economic conditions and positive employment outlook. Australia is currently seeing a surge in job advertisements. And when you couple that with the reopening of international borders, there are very positive tailwinds for tenant demand for Australian office property. Growth in employment numbers necessitates more office space, and we expect strong positive net absorption through 2022. In relation to a potential for rising inflation, it is important to note that commercial property is a natural inflation hedge, and many of things that drive inflation such as low unemployment and strong economic growth are tailwinds for tenant demand. In regards to increasing construction costs, this is already becoming evident in many markets across Australia. And while that certainly is an issue for developers, owners of established properties are somewhat insulated from these cost impacts and may, in fact, benefit as increased construction costs may temper off the supply. It is also worth noting that the majority of Australia's office supply currently under construction is concentrated in the Sydney and Melbourne CBD markets where COF has this exposure. Another aspect of increased construction costs is that it may lead to high levels of tenant renewals as the cost of fit-outs become prohibited. Again, this will be beneficial to existing owners of established properties, particularly those that provide quality affordable accommodation like COF. Strong investment demand for Australian metropolitan fringe and regional office assets continued through the first half of FY '22, and several of these transactions occurred in comparable office markets to COF have been detailed in the table on Slide 21. When this basket of comparable property transactions are collated, it demonstrates very strong demand as investors recognize the relative affordability and accessibility these markets provide tenants. The average metrics from these sales illustrate strong investor demand to the types of assets COF owns, with many selling on metrics that are stronger than pre-COVID sales and that are significantly tighter than COF's valuation metrics. Despite this, the sales metrics still compare favorably to other real estate asset classes. And the spread between cap rates for office assets and nominal bond yields remains above historic average. Concluding on Slide 22. Our focus for COF will be to continue generating predictable and quality income streams. We seek to build Australia's leading pure-play office REIT, positioning it to meet changing tenant demands while providing high-quality and affordable office space. In recent months, Australia has benefited from an uptick in white collar employment with Australia's unemployment rate at its lowest level in 13 years. This improvement in employment has translated into stronger tenant demand for office accommodation with around 185,000 square meters of positive net absorption across Australian office markets in the 3 months to 31 December. While COVID-19 continues to impact office markets, Australia has one of the highest vaccination rates in the world and one of the lowest mortality rates. Backed by the strength of the Australian economy, we expect to see tenant demand for Australian office improving throughout 2022. Across COF's portfolio, we are encouraged by the leasing activity that Centuria has been able to generate and continues to see across our invested markets. This leasing activity gives us confidence as we proactively address current vacancy and near-term expiries. In conclusion, COF continues to maintain a healthy balance sheet while its portfolio benefits from high-quality modern office buildings leased to strong tenant covenants. It remains in a strong position to continue delivering a compelling performance throughout FY '22. I will now hand you back to the operator and invite any questions that you may have.

[Operator Instructions] First question comes from the line of Lauren Berry from Morgan Stanley.

Just a question on your guidance. I guess you talked about there's some one-offs in the first half. I think that even if you strip those out, it would probably still imply your NOI in the second half is flat at best or potentially declining even though you've got your benefit from the 2 acquisitions you did in the period. Can you just talk about what's going into the second half? And if there's anything else we should be thinking about?

Sure. So as mentioned on the call, there are a couple of one-offs. And what that one-offs have effectively done is brought forward income that otherwise would have occurred in the second half of FY '22. So there is a bit of an imbalance there between the first and second half of FY '22. That would normalize through into FY '23 as those incoming tenants' lease commence or the lease commencements for those incoming tenants occur. The other thing to consider, and I mentioned this on the call, is that through the remainder of FY '22, we are still factoring in COVID relief. If we outperform that, there may be some further upside to the FY '22 guidance. But I think at this stage, it would be prudent to continue to factor in the rent relief that we are.

Okay. How is your rent collection figures in January versus what you did in the first half?

Yes, it's pretty consistent a view, a similar level to that circa 98%.

Okay, cool. And then just on the leasing that you did in the half. Are you able to talk about the incentives that you did on those deals? And then also what leasing spreads you were getting?

Sure. So the leasing spreads were slightly down. So we're a couple of percent below -- there were a couple percent below. And how we factor or how we calculate leasing spreads is that for tenant renewals, it is passing what the tenant was previously paying versus what was agreed for the new lease. And then for new tenant, it is against the market rents. Now for new tenants, we basically saw us achieve the market rents that we're seeking. But for some of the renewals, we did see a slight reduction in rents. In regards to incentives. So for new tenants coming into the portfolio, the greater rents that we provided was slightly over 30% and for lease renewals, it was somewhere in the mid-20s.

Okay. Great. And those deals, particularly the renewals that you're finding, what's the length of those leases like?

So it's been pretty consistent with what we've been doing for the last couple of years and even pre-COVID. They're sort of ranging from anywhere from 3 to 7 years, is pretty consistent with what we have been doing. It's -- we haven't been doing as many shorter-term deals as what has been reported in markets and for -- particularly through the COVID period where people were assuming there was a lot of short-term lease extensions. It's been pretty normalized in terms of that 3- to 7-year period.

Okay. Cool. And just last one for me. The Healius lease in the 203 Pacific Highway, what are your expectations for that tenancy when it comes up for expiry?

Yes, we're pretty optimistic about the opportunities for that building and particularly that tenancy. So Healius are currently paying a rent that is probably 10% below where we perceive market to be. And we are pretty optimistic that we will be able to lease that space reasonably quickly. So Healius expire in the second half of calendar year 2022. We already have a number of potential tenants that are looking at that space. So hopefully, as we get closer to full year results, we'll have a better guide on where we sit.

Next question will come from the line of Tom Bodor from UBS.

I just wanted to go back to that sort of front loading of income just to understand actually what it is. Is it lease surrender payments? And can you just give a sense as to the quantum of those payments? Or what does it relate to?

Yes. So the 2 most significant occurred at Williams Square and 825 Ann Street. Essentially, what it is, is we've got existing tenants that have sought to either surrender their entire lease or a portion of their lease. And then we've got incoming tenants that are coming into replacement. In most instances, those incoming tenants have got a delayed lease start. So some of them don't actually commence until the start or some time through FY '23. And what has occurred is the tenant that is surrendering the space has effectively prepaid the rent until that new lease commencement begins. So what has occurred for a good chunk of space is that you've got effectively the rent that you would otherwise have got for that space throughout the balance of FY '22 being paid in the first half. In terms of the quantum of areas, in Perth, that accounted for about a 3,500 square meter tenancy. In Fortitude Valley, it was for about 2,000 square meters, and there's been a few other small tenancies that have occurred throughout the portfolio. Now this is a normal course of business. We were aware of these situations coming up when we provided guidance at the start of FY '22. And I wouldn't assume it will continue going forward, but that's just the circumstances that we've dealt with this year.

Okay. So is it effectively people sub-leasing their space out to...

No, it's not...

[ Meeting ] their lease?

No. To an extent, it is similar to [ meeting ] their lease. But instead of tenants taking on the existing lease commitment, the lease -- the existing lease has been surrendered, and a new lease has been entered into with a replacement tenant.

Okay. And where that's happened, have you generally got an extension to the lease term? Or -- and have the rents been similar to the outgoing tenant? Or is it just dependent on the deal?

It does depend on the situation. So in some instances, yes. In some instances, no.

And do you have lots of other tenants looking to do that sort of thing and it's just subject to them finding someone to take out their lease? Or is it sort of -- have you feel like you've worked through all the interested people looking to hand back space products?

No, no, these were -- these have been fairly unique situations that I don't foresee occurring regularly.

Okay. And then just can you give a sense as to the quantum of the impact to the results on that?

Well, as mentioned, the impact on the full year is pretty negligible. It's more that you've seen it pulled forward. Say, probably that's not what [indiscernible].

Okay. That's great. And then final one for me just around Docklands. Where is that sitting at the moment in terms of discussions with potential tenants? And how are you feeling about getting income into FY '22 versus '23 for that asset?

So we have started leasing some of that space. As mentioned on the call, we have got an agreement for a circa 600 square meter tenancy for what was the vacated space. Now obviously, Melbourne has been substantially impacted by ongoing lockdowns, and that has really continued to impact our leasing momentum on that space. I think when we spoke at the full year results, circa '21, we probably didn't recognize the impact that lockdowns would have for the remainder of that -- the calendar year 2021 period. But that certainly continued to impact our ability to get any substantial leasing traction. As we sit today, we do have a number of tenants that are looking at various parts of the vacancy in that building. From this point, I think it would be unlikely that we'd be getting much income into the remainder of FY '22. Our current forecast is assuming that we'd be getting the balance of that space leased and income generating from FY '23.

Next question comes from the line of Sholto Maconochie from Jefferies.

Just follow-up from Tom's question. Obviously, I get it normalizes for the full year because it is prepaid what was due to the remainder of '22. But do you have the actual number, like the total, so we can normalize second half? What was the actual quantum of the surrender payments in total that was normalized that won't be there in the second half?

So you're probably looking at in the realm of a couple of million bucks. So that's probably how -- yes, that's probably where you'd be.

Yes, all good. And then I think you said you'll have a similar provisioning for waivers and ECLs in the second half, so about $1.3 million again, which could obviously be better than that...

Yes.

But it could release -- okay, 1 point good. All right. And then you've spoken about the quality, which you've done a great job of leasing in the period and the quality attract tenants given the floorplates and amenity and ESG. You've got about 10% on B grade. Would you look to divest some of that B grade? Or what's your view on that? Or reposition it, what's your view on that sort of 10% B grade?

Yes. Look, I think when you're thinking about B grade, B-grade assets can still have a place within a portfolio. It really depends on where they sit and what they're offering. I think if you've got a B-grade building that is surrounded by A-grade buildings with a reasonable amount of vacancy, I think that is where you would have concern. But when you've got some B-grade buildings, and one I would mention would be something like a 555 Coronation Drive, that is in very close proximity to the Toowong train station. It's across the road from a ferry. It is in such a location that I think it will continue to attract pretty strong tenant demand into the future. So when we're looking at those assets, in fact, they are going to be the minority of our portfolio, but I think some have their place. But as we move on, if we [ keep on ] that we have B-grade assets that we think will come under leasing pressure, then that may be something that we would consider in due course.

Okay. And is there any -- with gearing sort of at the -- towards the higher end of the range, [ the valves ] aren't -- [ the valves ] haven't been pushed too hard to $28 million, is there any acquisitions sort of you're looking at all markets that you guys are looking actively to supplement the portfolio?

Look, as we sit right here right now, there isn't anything that we are immediately considering. But across the group and to COF specifically, if we continue -- we will continue to monitor potential acquisitions. And if we think there are opportunities that do complement our portfolio and strategy, then that is something that we may pursue into the future.

Next question comes from the line of Murray Connellan from Moelis Australia.

I was wondering whether you could just touch on leasing inquiry levels as we move into the new year. Have you seen much of a change in activity versus Q4 of last year? Or is it still too early to say? I mean, I guess just if you can maybe just touch on, I suppose Melbourne CBD is the most pertinent one, but Sydney and Brisbane, do you have a couple of expiries coming in there as well?

Sure. Yes, we're getting pretty decent levels of leasing inquiry across Australia at the moment. So we've done -- in terms of the leasing we've completed over the course of the half, we completed leasing in Queensland. We've done a fair bit of leasing in Chatswood, which has been pleasing because that is our most pressing expiry or near-term lease expiries in Sydney. A fair bit of leasing in Adelaide as well which has been good. So there has been pretty good activity nationally. To answer your question specifically to Melbourne. As mentioned on the call, particularly large corporate and government tenants have probably been less active than tenants at sub-1,000 square meters. That's particularly impacted our leasing assets in a market like Docklands where we've got 3,500 square meters of floorplates. One thing that we are finding interesting in Melbourne, at the same time as we've got vacancy at Docklands, we've got about 3,500 square meters of vacancy in Richmond. We're probably generating better levels of tenant inquiry in Richmond than we are or what we're seeing through the CBD, which we think is certainly interesting, but also to the thesis of what COF invests into, I think it certainly reinforce as our broader asset strategy for COF.

And then just could you just touch on your gearing comfort levels at the moment? I mean it obviously feels as if cap rates have been compressing a touch over the last 6 months. How are you guys feeling about that 33% level at the moment?

Yes. Look, we're more than comfortable with where our current gearing sits. As mentioned on the call, we've got substantial debt covenant headroom, and we haven't got any debt tranche expiring occurring for the next few years. And we're very comfortable with where asset valuation sit. If you go to that table that we've mentioned in the presentation, there has been some very strong investment evidence that would suggest that COF valuations are in no way under pressure. So we're very comfortable with where our gearing sits at the moment.

[Operator Instructions] There are no more questions from the phone line. I'd like to hand the call back to the management for closing.

Well, I'd like to conclude by thanking everyone for joining us today. If there are any further questions, please feel free to reach out to the Head of Investor Relations, Tim Mitchell; the Assistant Fund Manager, Liam Schofield or myself, and we'll get back to you in due course. Thank you, and have a good day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.